Corporations or People? Restoring the Common Good

When Maine governor Paul LePage ordered the removal of a mural depicting the state’s labor history from the Department of Labor headquarters because it was “not in keeping with the department’s pro-business goals,” he perfectly (if unknowingly) captured our economic system’s loss of purpose. There’s a reason it’s the department of labor, not the department of business. The point of capitalism used to be to create prosperous lives for the American people—most of whom labor. But today it has no point beyond the health of corporations—the means have become the end.

This shift began at least thirty-five years ago. As rising economic powers threatened U.S. economic hegemony, corporations reacted by moving offshore and slashing wages and benefits. Financial analysts hailed this harsh but profitable response: the massive layoffs were “long overdue” and showed a willingness to make “tough decisions.” Meanwhile, the analysts noted, increases in the unemployment rate caused “euphoria” in the bond market, whereas a brief fall in unemployment to a fifteen-year low was proof that the U.S. economy was “too strong” and “way out of line.” The destruction of people’s lives was a collateral effect; what mattered was that profits were preserved.

Corporations and the common good weren’t always at odds. The first corporations were individually chartered by the states to serve a particular public purpose—building a bridge, say, or a turnpike. In upholding the legislature’s amendment of a corporate charter in 1809, the Virginia Supreme Court said

With respect to acts of incorporation, they ought never to be passed, but in consideration of services to be rendered to the public. …[I]f [the corporate founders’] object is merely private or selfish; if it is detrimental to, or not promotive of, the public good, they have no adequate claim upon the legislature for the privileges.

Even long after general incorporation laws allowed corporations to form for any lawful purpose, the welfare of corporations remained linked to the public welfare. Post-World War II prosperity rested on an implicit (and occasionally explicit) social contract between management and labor. Unions ceded almost unbridled discretion over management of the firm in return for rising real wages, employment security, and continually improving working conditions. It was understood that workers and management would share equitably in the nation’s increasing wealth.

For three decades the social contract held. Real wages grew by as much as 3 percent per year while almost all corporate employees gained health care, pensions, and paid vacation and sick leave. Tax rates were staunchly progressive—in 1960 federal taxes on the highest earners exceeded 70 percent, largely because of higher corporate and estate taxes—ensuring that the country’s prosperity was broadly shared.

This has long ceased to be the case. The statistics are both familiar and startling. From World War II until the 1970s, the wealthiest 10 percent of the population received about one-third of the nation’s income. Their share now is at least 50 percent, higher even than at the stock market peak in the 1920s. The top 1 percent alone receives over 20 percent of income and the top tenth of 1 percent receives 9 percent (compared to 2.5 percent during the 1970s). Wealth is even more concentrated. The top 1 percent of the population controls 35 percent of the wealth. The bottom 80 percent controls 13 percent (the bottom 40 percent less than 1 percent). Over the last fifty years wealth has shifted to the top 5 percent of the population; all groups below that have seen their shares decline.

Of the many reasons for these trends, two should be noted. Tax rates today are much less progressive. And corporations stopped sharing the wealth. Because men comprised the great bulk of the labor force through the 1970s, their wages offer the most telling comparison. In real terms, men’s median earnings peaked in 1974, and they remain lower almost forty years later. The only reason families have seen modest increases in real income is the explosion in two-income couples and the significant increase in wages for women, who until the 1970s were largely excluded from higher-paying occupations. Families supported by the husband alone had a lower real income in 2009 than in 1973. Meanwhile, pensions have all but disappeared while ever fewer employers offer healthcare and sick leave, or even paid vacations and holidays.

Globalization alone cannot explain this phenomenon. From World War II through the 1970s, increases in compensation largely tracked increases in productivity. Productivity growth has slowed since then but has far outpaced wages. During the 1980s real wages fell even as productivity continued to increase. From 1989 through 2010 productivity grew more than three times faster than private-sector wages. At the same time CEO pay went from modest multiples of the average worker’s earnings to hundreds of times average worker pay, far outpacing the growth in corporate profits (which themselves far outpaced the increase in wages). The wealth workers were creating was being transferred to shareholders and, increasingly, to corporate executives. The social contract was no more.

The new social contract may be found in a report issued last year by the U.S. Chamber of Commerce, which, as “the voice of business,” represents over 3,000,000 commercial enterprises. Titled “The Impact of State Employment Policies on Job Growth,” the report ranks each state by how friendly it is to business; those rated “good” have favorable employment policies while those rated “poor” have “burdensome” policies that, according to the Chamber, impede economic performance (states with a mixed record are rated “fair”).

The Chamber distinguishes in a very particular way between “favorable” and “burdensome”: it rates states by the extent to which they allow corporations to run roughshod over employees, and the harsher the treatment the better. For example, a state is rated low if state labor regulators zealously enforce labor law, or if corporations that commit labor law violations are temporarily barred from receiving state contracts. A state is rated highly if violations of the law go unpunished. Thus, New Jersey was rated “poor” in part because of “aggressive enforcement of commission on human rights and labor department.” The state of Mississippi, on the other hand, was rated “good” in part because it is the only state that adheres minimally to federal discrimination law, with no additional protections or penalties.

States lost points if they make business share the wealth. Although the real value of the federal minimum wage peaked in 1968 and today is barely above poverty level for a family of two, states gained points for adhering to the federal minimum or, in the case of Arizona, for “prohibiting political subdivisions from enacting a minimum wage increase in excess of the federal minimum wage.” Maryland and Massachusetts, on the other hand, were downgraded for adopting living wage laws (which mandate higher wages for government contractors), and Nevada for requiring employers that do not provide health insurance to pay “a full dollar-per-hour higher” than the federal minimum—hardly enough for the employee to purchase health care on his own. The Chamber’s hostility to workers extends even to those cast aside: states were rated lower if they have generous workers’ compensation and unemployment benefits, higher if they squeeze the injured and the unemployed.

The Chamber claims that by leaving business unfettered the “good” states promote growth, while excess regulation in the “poor” states strangles economic progress. Yet of the twenty states with the highest median household incomes, only two were rated “good” while ten were rated “poor.” Only three of the fifteen states rated “good” have per capita personal incomes above the national median versus eight of the fifteen states rated “poor.” On the other hand, nine states rated “good” have above-average child poverty rates compared to only two states rated “poor.”

It appears that what’s good for business is not necessarily good for people. This is unsurprising. Workers prospered because of the post-war combination of strong unions and active government. Changes in the workforce and corporate hostility have reduced union membership from a high of 35 percent of private-sector workers in the mid-1950s to under 7 percent today. At the same time, thirty years of unrelenting anti-government rhetoric by the Republican Party have radically diminished the country’s belief in activist government and emasculated the federal government’s ability to act boldly on behalf of workers. For example, no matter how high the unemployment rate (or how deteriorated the country’s infrastructure), a WPA-style jobs program can’t even be considered.

Workers have one last source of power: union membership in the public sector remains at 36 percent, higher than the private sector’s 1950s peak. Therefore public-sector unions have become the final target.

Governor Scott Walker of Wisconsin began the assault on government workers with a bill to take away almost all collective bargaining rights from the state’s public employees. After the bill passed in March 2011, anti-union sentiment spread across the country. Indiana and Ohio passed similar restrictions, while hundreds of bills have been introduced in state legislatures to restrict activities of public-sector unions.

The rationale for the bills is twofold: huge state deficits and the overpayment of public employees. The first rationale is indisputable. But what of the second? Some studies have found that, when benefits are considered, public employees do earn more than private-sector workers. Other studies, however, have noted that public-sector workers are considerably more educated and skilled than private-sector workers—in Wisconsin, for example, 54 percent of full-time government employees have college degrees versus 35 percent in the private sector—and that when you compare like to like public-sector workers earn slightly less.

But even these studies miss the crucial point. The debate has been over whether public-sector workers are overpaid. With private-sector wages having stagnated for decades; with employers relentlessly slashing benefits and transferring their cost to employees—let us even accept that government workers are doing better. The obvious conclusion: private-sector workers areunderpaid.

Hence the truth that dare not speak its name: for over a generation our economic system has been failing our nation. Yet so entranced are we by the magic of the market that we cannot conceive of judging by any other standard. Instead of being applauded for achieving the American Dream, government employees are condemned for attaining a degree of economic security and (allegedly) affluence that has eluded most private-sector employees—for attaining (if through government employment) the promise of capitalism. Their success is seen as failure, as conservative politicians argue that public employees must accept the same wage cuts and benefit reductions as workers in the private sector. Astonishingly, what was once the goal of the economic system is now the problem.

The destruction of public-sector unions will not only lower employee wages. Government and unions are the two forces that have leavened the country’s staggering inequality. The only reason public-sector wages are even roughly comparable to private-sector wages is that the public sector sets a floor on compensation, with less-educated workers earning more than their private-sector counterparts. College graduates in the public sector earn considerably less than college graduates in the private sector. The difference is greatest for the highest-paid professionals, such as lawyers and doctors.

The wage floor is largely due to the high rate of unionization in the public sector; the “union premium”—the amount by which union wages exceed non-union wages—is also greater in the private sector for less-educated and lower-skilled workers. Unions offered these workers a decent existence.

Of course this was once the great promise of America—that even someone with little education, who worked with his hands, could nevertheless attain a modest degree of affluence. It may be natural for educational requirements to rise over time. Yet too many people are being left behind.

Government has failed to reverse this downward course. Indeed, government tax policy is largely responsible for the greatest inequality in the industrialized world. As billionaire Warren Buffet famously said, he pays a lower tax rate than his secretary or the woman who cleans his house. But using tax policy to redistribute wealth is falsely damned as socialism. Given record corporate profits, staggering levels of executive compensation, and the retention by corporations of almost all increases in productivity, redistribution would merely be returning to workers the fruits of their labor: it is quintessentially capitalist.

Last year marked the hundredth anniversary of the Triangle Shirtwaist Fire, in which 146 garment workers, mostly teenage immigrant girls, died in a fire in New York’s Greenwich Village, when a match ignited a pile of rags allowed to accumulate because government did not yet regulate workplaces. This year marks the fourth anniversary of the Wall Street crash, a more prosaic tragedy that has damaged far more lives, as an unregulated financial sector was allowed to pursue profit at any cost.

Corporate profits have long ceased to be a sign of economic health. This understanding lies at the heart of the Occupy Wall Street movement. Although the movement may disdain official demands, the demands posted on its website by individual members, from the fanciful (i.e., immediate and total debt forgiveness for everyone on the planet) to the highly sober (real lobbying and campaign finance reform, fairer taxation), and the persistence of the movement itself, reflect a realization that without fundamental change wealth will continue to become ever more concentrated, while fewer and fewer Americans enjoy secure and prosperous lives.

If we are to reclaim the American promise, we must stop equating the health of business with that of society. We must support the labor movement’s efforts to retain its last source of strength. Government must reclaim its historic role of ensuring a degree of fairness in the distribution of society’s wealth. Above all, we must recognize that an economic system that does not put people at its center is not creating economic progress. It is simply awaiting the next disaster.

Barry Bennett is an attorney and an adjunct instructor of ethical decision making in the graduate business program at Marylhurst University in Marylhurst, Oregon. He has also taught corporate social responsibility at the University of Portland.